A strong showing of business transient and group demand drove performance for RLJ Lodging Trust's hotels, particularly those in urban markets.
Speaking during the hotel real estate investment trust's third-quarter 2024 earnings call, RLJ Lodging Trust President and CEO Leslie Hale said results came in ahead of expectations despite the impact of storms later in the quarter.
Revenue per available room growth again beat the industry average, demonstrating the resiliency of the company’s urban-centric portfolio, she said. Its effective expense management allowed it to drive earnings before interest, taxes, depreciation and amortization growth that exceeded its year-over-year RevPAR growth.
The REIT also made meaningful progress in its key initiatives, positioning it well heading into 2025, Hale said. Those objectives included refinancing all its near-term debt maturities and executing attractive interest rate hedges, completing two hotel conversions, accretively recycling proceeds from non-core hotel sales into share repurchases and increasing the quarterly dividend by 50%.
“Achievement of these objectives demonstrate our commitment to unlocking value in our portfolio while recycling capital to enhance total shareholder returns with respect to our third-quarter operating performance,” she said.
Quarterly performance
RLJ’s 2% RevPAR growth rate during the quarter was twice that of the broader hotel industry, and the growth continues to be a balance between rate and occupancy, Hale said. The company's hotels gained 100 basis points of market share, the sixth consecutive quarter of outperformance, which underscores the strong positioning of the urban-centered portfolio.
The REIT’s urban hotels continue to drive outperformance, achieving 2.5% RevPAR growth, she said. Hotels in RLJ’s urban markets benefit from the positive trends in all demand segments, with Boston, Chicago and Southern California achieving high single-digit RevPAR growth.
“Our deliberate efforts to reposition our urban footprint allowed our urban lifestyle hotels to achieve 3.2% RevPAR growth during the quarter,” she said, adding this segment of hotels represents 40% of the portfolio.
The ongoing improvement in business transient demand, again the top-performing segment, continues to lift the portfolio, Hale said. The business-transient demand saw nearly 9% revenue growth compared to the prior year, driven by both average daily rate and occupancy gains. Pricing power drove 5.3% ADR growth, an increase of 105 basis points compared to the second quarter.
Small meetings and events remain a dominant driver of corporate demand, she said. There’s positive momentum from large corporations, which are increasingly returning to the office.
“The recent trends and the continuation of company mandates provides us with the confidence that steady growth in business-transient revenues will continue,” she said.
The group segment continued to see strong performance during the third quarter, reaching 3.4% revenue growth due to a 1.4% increase in demand and 1.9% in ADR growth, she said. Group revenue benefited from both an increase in corporate meetings as well as strong citywide volume in many key markets, including Boston, Chicago, San Diego and New Orleans.
Group revenue pace for 2024 remains ahead of 2023 by mid-single digits, inclusive of pace for the fourth quarter despite the impact from the hurricanes, the U.S. presidential election and holiday calendar shifts, she said.
Overall, the continued strength of business transient and group production drove a 3.1% increase in third-quarter weekday revenue, she said.
Stable demand trends in leisure travel resulted in 2% revenue growth for the segment, Hale said. Demand grew by 4%, but it was offset by a 2% decline in ADR, showing consumer pricing sensitivity.
Along with solid rooms revenue growth, out-of-room spend in areas such as parking and food and beverage helped the company grow non-rooms revenue by 7.3%, driving total revenue growth of 3%.
“This top-line growth combined with our focused approach to managing costs, which has led to the moderation of operating expense growth, has allowed us to achieve flat margins and a year-over-year EBITDA increase of 2.6% In the third quarter,” she said.
Looking ahead
There are some unique factors that will affect hotel industry results during the fourth quarter, namely disruption from Hurricane Milton in October and some degree of a slowdown around the U.S. presidential election, she said.
“However, despite these unique headwinds, our strong third-quarter performance and the resiliency that our urban center portfolio is demonstrating gives us confidence in our outlook,” she said.
The executive team expects 2025 to be similar to 2024, but RLJ's portfolio is well-positioned and should benefit from concentration in urban markets that are forecast to outperform the industry, she said. It should also benefit from the ongoing ramp-up of its hotel conversions, continued improvement in transient demand and strong citywide event calendars, including in New Orleans, which will host the Super Bowl, and Washington, D.C., which will host the presidential inauguration.
“We believe that all of these positive attributes should continue to allow us to be a top performer,” she said.
From a longer-term perspective, the hotel industry is positioned for multiple years of demand-driven growth given the continuation of secular trends of consumers prioritizing travel as inflation moderates and borrowing costs lower, Hale said. Business travel demand continues to improve due to the continued economic recovery as well as return-to-office trends. International inbound demand is also expected to improve.
“These factors, together with historically low new supply projected over the next several years, should provide multiple years of RevPAR tailwinds and be especially beneficial for urban hotels, which represent over two-thirds of our portfolio,” she said.
Capital allocation
During the quarter, RLJ strengthened its balance sheet and added incremental flexibility by entering into a new $500 million term loan, addressing the REIT’s 2024 and 2025 maturities, Hale said. It also entered into new hedges, allowing it to maintain one of the lowest-weighted average cost of debt at 4.5%.
RLJ sold a non-core hotel in Denver for $12.7 million, recording a gain-on-sale of $4.8 million. It recycled proceeds from recent sales toward the repurchase of 2.2 million shares for $20.7 million.
Within its hotel portfolio, the company completed the conversion of its Wyndham in Houston to the DoubleTree by Hilton Houston Medical Center Hotel & Suites, she said. It also converted its Hotel Indigo in New Orleans to the Hotel Tonnelle New Orleans, a Tribute Portfolio Hotel. The hotels are ramping well and achieved RevPAR growth of 17% year over year during the quarter.
The conversion of the Bankers Alley Hotel to Hilton’s Tapestry Collection is on track, she said. The rebranding of its Wyndham in Pittsburgh to the Courtyard Pittsburgh University Center is ahead of schedule. The transition of the Renaissance Pittsburgh to Marriott International’s Autograph Collection is expected for 2026.
The REIT continues to maintain its pace of completing two conversions a year, she said.
By the numbers
For the quarter, RLJ reported net income of $20.6 million, a 26.3% year-over-year increase, and total revenue of $345.7 million, a 3.4% year-over-year increase, according to its earnings release.
Comparable hotel EBITDA totaled $100.6 million, a 2.6% year-over-year increase. Its comparable hotel EBITDA margin was 29.2%, a decline of 11 basis points. Adjusted EBITDA was $91.9 million, a 3.6% increase over last year.
As of Sept. 30, RLJ had approximately $885.4 million in total liquidity, broken down to $385.4 million in unrestricted cash and $500 million available through its revolving credit facility. It has $2.2 billion in debt outstanding.
In September, it entered a new $500 million unsecured term loan that matures in September 2027 with two, one-year extension options. The proceeds from this loan were used to repay its existing $400 million term loan scheduled to mature in May 2025 as well as repay $100 million of the outstanding borrowings from its revolving credit facility. RLJ also executed several interest rate swaps below current prevailing rates.
During the third quarter, RLJ repurchased 1.6 million common shares for about $14.8 million. Year to date, it has repurchased 2.2 million common shares for $20.7 million using recycled proceeds from the sale of non-core hotels. As of Nov. 6, its share repurchase program has a remaining capacity of $229.3 million.
As of press time, RLJ’s stock was trading at $9.51 a share, down 18.99% year to date. The NYSE Composite was up 18% for the same time period.